Aug. 14 (Bloomberg) -- Jarislowsky Fraser Ltd., Manulife Financial Corp.’s third-largest shareholder, may add to its stake after the Canadian insurer took steps to reduce risk from plunging stock prices, Chairman and founder Stephen Jarislowsky said.

“I’m probably going to buy more,” Jarislowsky said yesterday in an interview at his firm’s headquarters in Montreal. “If I can double my money in two to three years, what’s wrong with that?”

Manulife declined about 42 percent in the past two years as earnings fell for five straight quarters. In May, the company reported first-quarter costs of C$1.15 billion ($1.06 billion) tied to equity-linked insurance products such as variable annuities. Manulife didn’t hedge most of its variable annuity investments until this year, forcing the insurer to boost reserves to cover shortfalls as stock prices plunged.

Manulife’s decision to hedge more of its annuities risk should help the stock recover, said Jarislowsky, 83, who co- founded the Montreal-based money-management firm in 1955 and now oversees about C$40 billion in assets.

“This mess will clean up and if they hedge it properly, they’ll make just as much money as they did before, so why wouldn’t the stock go back up again?” Jarislowsky said.

Toronto-based Manulife, Canada’s biggest insurer, cut its quarterly dividend for the first time on Aug. 6 to preserve capital. The move will save about C$800 million a year, Chief Executive Officer Donald Guloien said.

Hedging Bets

Jarislowsky Fraser held 49.5 million Manulife shares for clients as of June 30, according to Bloomberg data. The firm added about 4.6 million shares in the second quarter.

Manulife dropped 4 cents to C$22.33 by 4:30 p.m. in Toronto Stock Exchange trading. The stock gained 7.4 percent this year.

Jarislowsky said he talked with Guloien by telephone after the dividend cut announcement to complain about the company’s disclosure of its hedging policy. Guloien, 52, took over from former CEO Dominic D’Alessandro in May.

“What I really objected to was that I was told before that there was no problem,” Jarislowsky said. “My indication to them was that I am not buying Manulife stock to do that kind of gambling. I am a conservative investor. I don’t buy stocks where people throw the dice.”

Guloien told investors earlier this month that Manulife plans to cut risk.

“We are making progress, pretty significant progress at reducing the exposure through hedging,” he said on an Aug. 6 conference call. “We are not planning to do it all in one fell swoop. We do not feel it is in our shareholders’ interest to go and hedge the entire position.”

‘Demoralized Market’

While Jarislowsky said he was surprised by the 50 percent dividend cut, he agrees with the decision.

“I don’t like dividend cuts, but it was the prudent thing,” he said. “It’s wiser to take that attitude rather than having to do another issue of stock in a totally demoralized market.”

Jarislowsky doesn’t expect Canadian banks to follow Manulife and cut their own payouts.

“They are making money than they ever did before,” he said of the banks. “The spread between the interest they pay and the interest they receive is astronomical.”

Of Canada’s five largest banks, Bank of Montreal would be the most at risk because of its higher payout, Jarislowsky said. Bank of Montreal has a dividend yield of 5.5 percent, compared with 4 percent for Royal Bank of Canada and 3.9 percent for Toronto-Dominion Bank, the country’s two biggest lenders. Bank of Montreal ranks No. 4.

“If earnings really come down they have little alternative,” he said. “But from what I understand, they will do everything to maintain the dividend.”

To contact the reporters for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net;

Last Updated: August 14, 2009 17:27 EDT